On July 26, 2023, the UK Supreme Court decided in R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents)  UKSC 28 that litigation funding agreements (“LFAs”) — where third party funders agree to finance the legal costs of litigation in return for a percentage of any damages recovered — constitute damages-based agreements (“DBAs”) under UK law. Consequently, LFAs will be unenforceable unless they satisfy the statutory requirements for DBAs. In practice, this decision is likely to render many LFAs that are currently in place unenforceable, and will affect the type of funding arrangements available to claimants in collective proceedings moving forward.
This case stems from the European Commission’s 2016 decision that five truck manufacturing groups had engaged in anti-competitive behaviour in breach of competition law. In PACCAR, two proposed class representatives applied to the Competition Appeal Tribunal (“CAT”) to bring follow-on collective proceedings against the truck manufacturers arising out of Commission’s finding of anti-competitive behaviour. The proposed class representatives relied on LFAs to meet the costs of bringing the proceedings in the CAT. However, the defendants argued that the CAT should not certify the proceedings because the LFAs constituted DBAs and failed to satisfy the statutory requirements for DBAs. Upon the CAT’s rejection of the defendants’ argument, which was also upheld by the Court of Appeal, the defendants appealed to the Supreme Court.
Section 58AA(3)(a) of the Courts and Legal Services Act 1990 defines a DBA as “an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that-
- the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and
- the amount of that payment is to be determined by reference to the amount of the financial benefit obtained.” (emphasis added)
A DBA is unenforceable if it relates to opt-out collective proceedings before the CAT, per Section 47C(8) of the Competition Act 1998. In other situations, a DBA must satisfy the applicable statutory conditions, particularly those in the Damages-Based Agreements Regulations 2013 (2013 Regulations), in order to be enforceable.
At the core of the truck manufacturers’ appeal was the argument that LFAs constitute “claims management services” as defined in the Compensation Act 2006 and incorporated into the statutory definition of a DBA.
The Court allowed the appeal by a 4:1 majority, holding that the definition of “claims management services,” read according to their natural meaning, is capable of encompassing LFAs. Consequently, LFAs will fall within the definition of DBAs, and not constitute a valid funding arrangement for opt-out collective proceedings. For opt-in collective proceedings, LFAs will need to satisfy the applicable statutory conditions to be enforceable.
The impact of the Supreme Court’s decision on collective proceedings and other funded cases in the UK may be significant, and the Covington team continues to keep a close eye on developments. If you have any questions about this judgment, or collective proceedings in the UK more generally, feel free to get in touch with a member of the Covington team.